Dollar rebounds after central banks act
FRANKFURT, Germany (AP) — The dollar fell to a new low against the euro on Tuesday, but reversed course after the U.S. Federal Reserve, European Central Bank and Bank of England announced another joint effort to soothe money markets with fresh short-term credit.
The euro initially soared to $1.5495, bolstered by a better-than-expected reading of investor sentiment from Germany.
The rise in the ZEW institute’s monthly confidence index — a closely watched indicator for Europe’s biggest economy — defied analysts’ predictions of a slight decline.
The report pushed the euro above its previous high of $1.5463, set Friday.
But when the Fed, ECB and Bank of England announced that they were joining with other central banks to ramp up efforts to provide more relief in the credit crisis, making as much as $200 billion in cash available to cash-strapped financial institutions, the euro dropped as low as $1.5293.
By late afternoon it Europe it was at $1.5320. That compared with the $1.5352 it bought in New York late Monday.
Ashraf Laidi, chief foreign exchange strategist for CMC Markets in New York, said the announcement pushed the euro lower because it all but eliminated the chance for a rate cut by the Fed before its next meeting.
This coordinated central bank injection of liquidity totally cancels the changes of an inter-meeting rate cut for the Fed and this provides temporary support for the U.S. dollar, Laidi told The Associated Press.
As we know, rate cuts are bad for the U.S. dollar and inter-meeting rate cuts are very bad for the U.S. dollar.
The decision, he said, would allow the Fed to make the anticipated 50 basis point rate cut on March 15.
Currently, the Fed’s interest rate stands at 3 percent — compared to 4 percent in the euro zone, where the ECB has left rates unchanged since last summer.
In other trading, the British pound fell to $2.0039 from $2.0101. The dollar was higher against the Japanese currency, rising to 103.22 yen from 102.40.
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